no drama - just next steps advice needed!

**kork13** · 10-16-2008, 09:29 AM

Hello! And congratulations, as you stated you're in a pretty good position. First, my responses to your questions...

1) You would be okay if you stayed as you are. That said, I think you could do better by making some simple changes. $18.6k in a savings account sticks out to me as alot. Are you just that uncomfortable with your job security, or your ability to get a new job if you were laid off? If this is not so, I would say that you are fine with only maintaining about 6 months' worth of expenses.

2) If you look around on these boards, there are alot of people who are buying additional stocks/MF's. Of those who are not, most are maintaining their normal investment plans. I would recommend you start investing some money in some simple MF's (even if just a few hundred dollars a month). Index funds are great for that. You might check out starting in a set of basic index funds following (for example) the S&P 500, Wilshire 4500, and an International index (can't really name one off the top of my head). Index funds are a simple and low-cost way to start into the market.

3) For my EF, I'm doing half in an ING savings account, half in a 6-month CD ladder (also all in my ING account). I personally like the combination of liquidity with higher guaranteed returns. You might consider that as an option. Again, however, I would say cut your total EF down to only 6 months' worth of expenses (unless you feel 1 year is truly necessary for you).

4) I money markets generally make more than a savings account (my bank's MMF is getting 3.5-4% right now), but take on a bit more risk. As occurred a couple weeks ago, there is some risk that it could "break the buck" and actually go down in value. However, if you hold a MMA or MMF with a strong bank/investing firm, they will generally do everything they can to back up those assets, so they're fairly safe. I use mine as my "spending" savings, basically money that I'm setting aside for future purchases, or for investing whenever I would like to increase my positions in the market.

5) At a fixed 3% rate, I would leave your student loans as is. That's a great rate, and you can probably be more productive with your money in ways other than paying off your student loans early.

Other thoughts:
** You should increase your monthly Roth contributions. You should max it out if at all possible, which is $416.67/mo.
** Just curious, what is your Roth's asset allocation? Just guessing based on your distrust in the market and the level of savings you have, it might be more conservative than really it should be given your age.
** How much disposable income do you have each month? What do you do with it? If you have extra (if not, pretend you do), what would you want to do with it? Invest it? Save it? Spend it? Put it to retirement?

**jIM_Ohio** · 10-16-2008, 10:36 AM

I would up the Roth contributions to $500/month. In November and December just add the $500 to EF. This way the Roth is maxed and you have a budget to add a moderate amount to the large EF.

I would be buying stocks instead of increasing cash. Once market goes up 5% for the month, I would consider stopping and increasing cash again, but while market is falling I would be buying low.

**StepRightUp** · 10-16-2008, 11:02 AM

thanks, kork and jim

these are good ideas that i've knocked around but it sounds like I should get a little bit more serious about them.

so, i'm thinking i could reduce what I put in the ING monthly and instead give it to my Roth

And it does seem like time to get involved in the market.

**anonymous_saver** · 10-16-2008, 01:29 PM

(1) Is there a reason you need a 12-month emergency fund? I would consider taking half of this money and starting a down payment fund (assuming you want to some day buy a home).

(2) I would not put extra towards your school loans, as long as you start saving more money towards retirement.

(3) Stop sending money to your emergency fund every month. Take this $200 to max your Roth IRA contributions. Since the max for IRA contributions is currently $5,000, when you get to this point, just put that extra money for those months towards building up that down payment. What is your asset allocation for your Roth IRA?

(4) Since you work for a non-profit, do they offer a 403(b) option? If so participate up the match immediately! If they don't I would still start saving a bit in there. Even if you start at 1% (or more!) and add 1% every time you get a pay increase that would be a start.

Your doing well by the way, be proud of yourself!

**StepRightUp** · 10-16-2008, 01:36 PM

no - I certainly don't need a year EF. That's why I'm writing, because I know I gotta do something better with it. I've taken into account your suggestions and have come up with this back-of-the-napkin scenario:

$18,500 total savings

$5 K in a ladder CD-setup ($1,000 in a 1 yr, 2 yr, 3 yr, etc.)
$1,500 to my IRA to max out 08
$5,000 in my ING account

That leaves $7,000.

$4,000 in a Money Market, $3,000 in a new Mutual Fund?

From here on out, change EF contributions to IRA contributions to max it out.

Thoughts on the above? Would that be too much (percentage-wise) tied up in CDS?

**kork13** · 10-16-2008, 01:38 PM

nevermind, nothing to see here. My question was clarified in the post above, posted while i was writing...

**anonymous_saver** · 10-16-2008, 01:40 PM

Do you have a retirement plan offered through your employer?

**StepRightUp** · 10-16-2008, 01:46 PM

sadly no, I'd be taking advantage otherwise.

I do have about $2,000 in a TDA from a former employer that I didn't list previously. Thus is the difference between large and small non-profits.

**jIM_Ohio** · 10-16-2008, 01:58 PM

Originally posted by StepRightUp View Post

no - I certainly don't need a year EF. That's why I'm writing, because I know I gotta do something better with it. I've taken into account your suggestions and have come up with this back-of-the-napkin scenario:

$18,500 total savings

$5 K in a ladder CD-setup ($1,000 in a 1 yr, 2 yr, 3 yr, etc.)
$1,500 to my IRA to max out 08
$5,000 in my ING account

That leaves $7,000.

$4,000 in a Money Market, $3,000 in a new Mutual Fund?

From here on out, change EF contributions to IRA contributions to max it out.

Thoughts on the above? Would that be too much (percentage-wise) tied up in CDS?

What is 1 months worth of expenses? $1500 is my guess.

Put $1500 into a 90 day CD, 120 day CD and 150 day CD. Then roll these into 90 day CDs at maturity-this is a short term CD ladder.
$4500 is in short term CDs with one CD maturing per month

I would then do $500 deposits (minimum) for 13 month CDs (usually 13 month have higher interest than 12 month)
Open one in November, One in December, opening one per month (on same day per month).
$6500 is now tied up into mid term CDs paying much higher interest than the short term ones (rates might be doubled), and you have one CD maturing each month

That is $11000 tied up in cash.
I would invest the other 7k

Put $1500 into Roth for 2008- good idea. Keep this in equities.
I would open a moderate risk mutual fund with the other $5500. I use PRPFX (Permanent Portfolio) and others here use RPSIX (Spectrum Income- I own that too). Goal is to have money which is conservatively invested and liquid, but will return more than the CDs. This fund works well for new house fund, new car fund. a dream vacation fund or emergency fund replacement fund. This will fluctuate in value every day, but also pay close to 4% interest quarterly or increase 4-5% annually (return and interest is not guaranteed).

What you suggested would work, just keep in mind that as interest rates change your portfolio will see a volatile return on cash- I prefer my cash returns to be locked in, you need to look at what you suggested:

5k in ING
4k in a money market fund
5k in CDs
3k invested in equities

9k of this will have it's return vary with the interest rates prevailing at the time. Considering that money markets were paying close to 5% in January and most are half that now, you can see how sensitive returns will be.
The CDs will lock in your rates. The short term CDs will be able to capture prevailing rates quickly and the 12 or 13 month ladder should get you good returns and higher interest rates which stay locked for 13 months. When rates are low (like now) you might consider lengthening the time or taking money out of the CD and putting into equites.

The $4500 in 90 day CDs is always 1 months expenses locked in for 90 days, with access to 1 months expenses every 30 days.
The $6500 in 13 month CDs is there to get a higher return/ higher interest rate than the cash. I suggested this because you intended to keep close to 14k in cash anyway.

In addition you need to determine an asset allocation and decide if the cash is part of the allocation.

Let's say you decide that my idea is OK. It is $7000 in equities and $11000 in CDs. (almost 40% equities and 60% cash).

If the market drops like it has recently (down 40%) are you willing to take the $500 CD and invest it into market when it matures until you have 40-60 again?

If the answer is yes- you include the cash in the allocation.
If the answer is no- you do not include cash in the allocation.

Decide this when you start and use this to take the emotion out of the investment decisions (market goes down=buy, market goes up, you add a 14th $500 CD, maybe a 15th until market drops again- always keep 40-60 allocation).

**StepRightUp** · 10-16-2008, 02:07 PM

speechless, Jim

That gives me a lot to chew on.

Thanks a lot.

**jIM_Ohio** · 10-16-2008, 02:14 PM

I don't agree with liquidating the whole EF or even half of it. At least not all at once.

Keeping 3 months expenses is definitey a good idea. The question would be:
3 months, invest the rest ($4500 cash and $13500 in market)
6 months, invest the rest ($9000 cash and $9k in the market)
12 months (18k cash, invest little)

I am in camp where 3 months expenses covers the minor emergencies. I want more cash available, but earning a higher return than the first 3 months savings. That is why I suggest the moderate mutual fund. if this were me the 13 month CDs would either lengthen the ladder of the $1500 CDs (to 6 months) or I would add the 13 month CDs to the investment in the moderate fund. Much simpler that way.

You showed a need for 1 year, 2 year, 3 year CDs at 1k each, I wanted to illustrate that the 13 month Cd would have a higher rate of return than the 90 day CDs and the 12 month CDs.

Having a tiered approach to risk (3 months expenses in cash, another 9 months in moderate risk investments) helps me see that my retirement accounts (IRAs and 401ks) can be invested full tilt for growth because a portion of my portfolio is stable and conservative.

**disneysteve** · 10-16-2008, 02:35 PM

I agree that you should be maxing the Roth. That is $416.67/month (or $500/month for 10 months to use a round number).

I also agree that you don't need over $18,000 in your ING account. The tiered CDs is certainly a good way to go.

**kork13** · 10-16-2008, 04:14 PM

Originally posted by StepRightUp View Post

speechless, Jim

That gives me a lot to chew on.

Thanks a lot.

Jim is great for giving really good, detailed plans... This is why we keep him around, and pay him the big bucks.... ....oh wait

**maat55** · 10-16-2008, 04:38 PM

I would put the 200 going towards savings towards the SL. The Roth should be in the market, yesterday. Any long term investments should be in the market.

no drama - just next steps advice needed!